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Microcap & Penny Stocks : BASHERS POST THEM HERE!!!!!
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To: marcos who wrote (54)6/30/1998 8:19:00 AM
From: Henry Volquardsen   of 390
 
marcos,
My experience as a market maker is more in the bond and currency markets but I believe your characterization is correct, for the most part.

Market makers are running a business. It is a lucrative business that allows them to earn the wide spreads you see on these issues. These stocks are very thin and no not trade in the same pattern as liquid stocks. They have what I refer to as a step function trading pattern. That means they do not trade smoothly as expectations develop but make an explosive move, either up or down, as news surprises the market. In other words they make a one step jump. I have had to make markets in thinly traded currencies and I try to stay as neutral as possible.

So I would strongly suspect that the majority of market makers try to run very balanced books in these shares and not expose themselves to these step function moves. However this is not a perfect world and there are market makers who do take positions and engage in manipulative practices. There are a number of cases of the SEC busting these characters. The question is what is the most likely form of this manipulation. It is almost overwhelmingly people who hype a stock. It is easier and more profitable to manipulate via hyping than bashing. All you have to do is find a stock with an interesting story line, take a big position before anyne notices the stock, then hype the hell out of it, with or without the company's cooperation, and then sell into the resultant hype. It is less risky as well. If the company comes out with bad news the hype machine can always pump out some drivel and explain it away. Afterall the average investor is by nature hopeful and is ready to hear good news and accept explanations of bad news. Just look at any SI thread.

For a market making to manipulate a short is much more dangerous, especially if the company is not in on it. Many bulletin board stocks, especially healthy ones, are tightly held by insiders. They know the company and are tough to spook. The insiders can out wait them. The manipulators can also not control the news. They are at big risk if the company announces good news. It is much tougher to spin news to make good news look bad.

So in fact most market makers are honest businessmen looking to earn the spread. Some of the rules have allowed them to keep the spreads to wide but hat was not illegal and those rules are changing. There are however market makers who do get involved in manipulation but a simple review of SEC cases will show that they are almost always hyping stocks, not bashing them.

Henry
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